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Bank of Japan (BoJ) preview: Policymakers’ communications on pivot timeline remain in focus


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Thus far, communications around a policy-pivot timeline have been muddled, which will leave markets scouring comments for any hints at the upcoming meeting.

JPYSource: Bloomberg
 

 Written by: Yeap Jun Rong | Market Strategist, Singapore | Publication date: 

What to expect at the upcoming Bank of Japan (BoJ) meeting?

The BoJ is set to hold their monetary meeting across 22 – 23 January 2024, with broad expectations for its short-term interest rate target to be kept unchanged at -0.1% and for the 10-year bond yield around 0%, at least for now.

Earlier policy tweaks from the BoJ include raising the flexible bandwidth around its 10-year yield target to 1% in July last year, before the central bank headed for more policy flexibility in October 2023 by referring to the 1% bound as purely a ‘reference’.

These intermittent steps seem to lay the groundwork for an eventual policy pivot, but communications around the timeline from BoJ officials have been muddled, which will leave markets scouring the BoJ Governor’s comments for any hints at the upcoming meeting.

Positive wage-inflation and sustainable 2% inflation conditions still on the lookout

While BoJ Governor Kazuo Ueda acknowledged last month that prices and wages appeared to be moving in the right direction, he mentioned that conditions remained uncertain, seemingly calling for more time to assess that the pricing and wage trend will stick.

Fresh economic data following his comments also provided some validation for further policy hold, with Japan’s November headline wage growth slowing to its lowest pace (+0.2% year-on-year) since December 2021. Tokyo’s core inflation data, which served as a precursor to nationwide price trends, has also eased to its June 2022 level of 2.1%, giving the BoJ more room for patience in its exit plan.

Not to mention a devastating earthquake, which rocked Japan on New Year's Day. With the economic impact still uncertain and the country engaging in disaster relief efforts currently, it seems rational for the central bank to avoid rocking the boat for now.

 

Japan's inflation rate % YoYSource: Refinitiv

 

Market pricing for BoJ to end negative rates in 2Q 2024, fresh economic projections in focus

Market expectations are for the BoJ to end negative rates only in 2Q 2024, with comments from BoJ Governor Kazuo Ueda on watch to validate the timeline. Updated economic projections from the central bank will also be released. With an increase in inflation forecasts for FY2024 and FY2025 in the previous report, further upward revisions in inflation, though an unlikely case, could be a signal for markets for a quicker policy shift.

 

Expected Target RateSource: Refinitiv, as of 17 January 2024.

 

A look at Japanese 10-year bond yields revealed a moderation from its November 2023 peak to a near five-month low lately, seemingly a reflection of some dissipation in bond traders’ hawkish bets. The implied volatility for the 10-year government bonds futures has also been tame as compared to previous pre-meeting surges, which suggests broad expectations in place that the upcoming meeting may deliver less surprise and more of further wait-and-see.

 

Jpaan Government Bonds 10 YR YieldSource: TradingView

 

USD/JPY: Renewed move higher on widening yield differentials

Widening US-Japan bond yield differentials since the start of the year have driven a recovery in the USD/JPY, as US 10-year Treasury yields saw a renewed resurgence with some pushback against earlier Federal Reserve (Fed) rate cuts. The pair has managed to reverse above its Ichimoku cloud on the daily chart, with its daily relative strength index (RSI) reclaiming its 50 level for the first time since November 2023, leaving a near-term upward bias in place.

Further upmove could leave the 150.00 level of resistance on watch, where the BoJ has intervened in October 2022 with aggressive yen-buying. On the downside, the 146.50 level may serve as immediate support to hold, where the upper edge of the cloud stands.

 

USD/JPY MiniSource: IG charts

 

Nikkei 225: Starting the year strong with a record-breaking rally

The Nikkei 225 index has been an outperformer this year, pushing to its multi-decades high to trade at levels last seen in February 1990. Recent economic data has offered room for equities to continue basking in the supportive policy environment from the BoJ, with any dovish validation from policymakers at the upcoming meeting likely to keep the upward momentum going.

Thus far, foreign buying of Japanese stocks has been robust, with the latest data by the Japanese Ministry of Finance revealing a net 1.2 trillion yen ($8.1 billion) inflows into Japanese stocks last week, which marked its strongest buying spree since October 2023.

For now, a 10% rally since the start of the year calls for a near-term breather for the index, but a bullish flag continuation pattern remains in place to keep the broader uptrend intact. Further retracement may leave the 34,800 level on watch as support to hold, where a 23.6% Fibonacci retracement level stands. On the upside, the year-to-date high at the 36,200 level will be a near-term resistance for buyers to overcome.

 

Japan 225 CashSource: IG charts

 

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